Determination of the Appropriate Event Window Length in Individual Stock Event Studies

Abstract

It is common practice to assess the average effect of some type of announcement on stock prices by performing event studies on a large sample of firms and then averaging or otherwise combining the results. One benefit of this procedure is that the event window length can be standardized across observations because the errors from having too long or short an event window should have a small impact on the average by the Law of Large Numbers. Here, we examine various potential rules for determining the length of an event window when looking at a limited number of observations. We find that rules based on continuing price movements yield window lengths that correlate with the "size" of the news, as measured by the magnitude of earnings surprises, while a rule based on abnormally high volume does not have this property.

Keywords: Event Study

JEL Classification: G14